Healthscope bid increased

The board of private hospital operator
Healthscope
is considering a sweetened $1.82 billion takeover bid from TPG and The Carlyle Group after rejecting the private equity consortium’s initial $1.7 billion offer.

But prospects for generating some pricing tension within a mooted auction of the company were undermined yesterday as rival
Sonic Healthcare
rattled the healthcare industry with an 8 per cent earnings downgrade after the market closed.

It said the impact of government cuts to Medicare fees for pathology services meant it would not meet its full-year guidance.

Analysts said Healthscope’s trading update could help attract rival bidders, but warned the downgrade from Sonic would spook the market.

“It’s getting towards where I would be happy to accept, I thought $6 was a price where I’d go for it," said one Sydney-based shareholder yesterday.

“There’s obviously things going on behind the scenes, it seems to me that Healthscope has privately rejected the first offer," the shareholder said.

Healthscope shares are trading at about a 7 per cent discount to the terms offered by the private equity consortium, which traders said indicated the market was still pricing in a chance that the deal will not go ahead.

Healthscope, Australia’s second-largest private hospital operator, with 43 hospitals, said it expected near-term growth to be driven by additional beds and theatres at existing hospitals.

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The Healthscope board, led by chairman
Linda Nicholls
, said it would consider the revised $5.75 a share proposal received late on Wednesday night with the assistance of its advisers Goldman Sachs JBWere, Lazard and Minter Ellison.

It is understood the board will make a final decision relatively soon. “Private equity would be thinking that the underlying pathology business they’re buying is clearly having issues," a banker close to the deal said yesterday.

“If one of your buyers for a divestment issues a downgrade, it’s not looking good. This alone will not make them walk, but it will make them a bit nervous," the banker said.

Pathology revenue accounts for about 16 per cent of Healthscope’s EBITDA, compared with the 38 per cent contribution to earnings from pathology at Sonic.

In a statement to the Australian Stock Exchange yesterday, Healthscope said it was “well positioned to continue to deliver strong growth".

Analysts said Healthscope’s trading update could help attract rival bidders, but warned the downgrade from Sonic would spook the market.

“It’s getting towards where I would be happy to accept. I thought $6 was a price where I’d go for it," said one Sydney-based shareholder yesterday.

“There’s obviously things going on behind the scenes, it seems to me that Healthscope have privately rejected the first offer," the shareholder said.

Healthscope shares are trading at about a 7 per cent discount to the terms offered by the private equity consortium, which traders said indicates that the market is still pricing in a chance that the deal will not go ahead.

Industry sources say the private equity consortium does not intend to break up Healthscope’s pathology and hospital businesses, and that it intends to keep management in place.

It is understood TPG and The Carlyle Group plan to grow the business through brownfield and greenfield developments in hospital and pathology. Board support for the current deal is essential to achieve the 75 per cent shareholder vote threshold required under a scheme of arrangement offer. A source close to the company said: “The board formed a view that the first proposal was not acceptable."

Healthscope has had difficulty with deals in the past. It has been under pressure since a failed $200 million takeover of Melbourne-based aged-care group Arcare in February. It lost out in the $2.7 billion auction for pathology and medical centre group Symbion Health in 2008.

Healthscope won the recommendation of the Symbion board in May 2007 with a $2.8 billion offer, under which it would have gained control of Symbion’s pathology, radiology and medical centres, while Ironbridge and Archer would have taken the pharmacy distribution and vitamin businesses. But neither Symbion nor Healthscope were prepared for the competition Primary Health Care’s Ed Bateman would pose, blocking the sale with a 20 per cent vote and taking the company for a cheaper price.